An interesting idea, from the TODAY newspaper:The law says that before a bank sells you a financial product, the salesperson should ask you many questions to ascertain your risk profile. Based on your risk profile, the salesperson should then recommend a suitable product, and explain to you what that product is all about.Risk profiling for home buyers?
Such checks would minimise impact of sudden economic downturn on investors
Wednesday •December 17, 2008
Letter from Ee Teck Siew
MANY Singaporeans who bought properties during the boom years have since been caught up by the sudden financial turmoil and found themselves in a bind as the property market has taken an about-turn and some banks have frozen lending.
Such investors stand to lose a lot of money should they sell in this declining market. The problem is compounded for “flippers” who are stuck with properties bought under deferred payment schemes, which they had every intention of selling as soon as prices went up. At its worst, economic turmoil can bring about the collapse of the property market, causing severe consequences to the economy at large.
Many people do not consider whether they can truly afford a long-term asset such as property when prices skyrocket, and blindly jump into the market hoping to get a good bargain — either to buy a dream home while it’s available, or to make a windfall by flipping the unit.
As with the financial advisory and insurance industries, maybe it is time that the Government and the relevant industry body implement a fact-finding process for potential home buyers. Under the Financial Advisers Act/Financial Advisers Regulations, the fact-finding process is mandatory before any investment product can be sold. The objective is to ensure consumers buy what they can afford, taking into account their needs and risk profiles.
Buying a property involves substantial financial resources and, for the Average Joe, probably a lifetime of commitment to service the loans. Many could end up enslaved to their properties. They could face significant financial losses when a negative equity situation occurs, in that their outstanding mortgage loans could exceed the market values of their properties.
It is high time a more rigorous regulatory regime, one with a focus on educating consumers, be added to help Singaporeans in their financial decisions.
These legal requirements don't apply to all types of financial products. For example, they don't apply to credit cards, fixed deposits or mortgage loans. In the TODAY letter above, the writer suggests that perhaps the law should require banks to profile and advise customers who are seeking a housing loan.
Actually, if you ask a bank for a housing loan, it will definitely study you quite carefully. In fact, the bank will study you much more carefully than if you were asking to buy a Lehman Minibond. That's because where housing loans are concerned, the bank will be giving you its money to buy the house; whereas in the Lehman Minibond scenario, you will be giving the bank your money to buy the Minibond.
How does the bank study you, before granting you a housing loan? Well, it will ask for your salary statements; your income tax assessments; and/or your CPF statements. It will want to know your occupation, and where you work (and it may even make discreet phone calls to find out whether you really work where you claim to work). It may run checks to see if you've ever been made a bankrupt or defaulted on your credit cards. And of course, it will check the market value of the property which you want to buy.
Note that the bank isn't doing all these things for your benefit. It's doing all these things for its own benefit. It certainly isn't under any obligation to provide you with financial advice on whether the housing loan is suitable for you or not.
So when a bank agrees to give you a housing loan, this does not mean that the bank thinks it's good for you to take the loan and buy that house. It only means that the bank thinks that it's good for the bank to lend you the money and earn your interest. There's a difference ... and if you can't see it, you'd better look again.
As my regular readers know, I've recently been doing some house-hunting myself. As part of that process, I've met and discussed with a bank salesperson. Through these discussions, I've learned a few things about how banks assess the credit risk of their mortgage customers.
Here's one thing I learned - if all other checks are satisfactory, this particular local bank will grant its customers a housing loan such that the monthly instalment works out to be not more than 60% of the customer's current monthly salary. For example, if you earn $10,000 a month, then the bank will give you a housing loan such that your monthly repayment instalment works out to be $6,000 or below.
However, for the customer, the more relevant questions remain unanswered. Should you commit yourself to spending 60% of your monthly salary on your mortgage repayments? Is that financially advisable for yourself? That's what the bank won't tell you. You'll have to figure it out for yourself.